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Food Inflation: Don’t Panic, Yet

By Andrea Hotter

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Inflationistas are getting carried away with talk that the rising cost of food will result in another broad-based food price scare.

All we’re really talking about so far is wheat, a tiny component of the consumer price index and certainly not big enough to have a meaningful impact on emerging inflation. In China, breads and cereals are just 4.4% of consumption, and just 1.1% in the U.S. In Indonesia, this rises to 17%, but the country imports most of its wheat from Australia.

That’s not to say the soaring price of wheat hasn’t stoked inflationary fears.

The worst drought in Russia for 130 years has caused wildfires that have reduced the country’s wheat harvest forecasts and led the government to ban exports. As the world’s third biggest exporter of wheat in the 2008-09 crop year, Russia’s importance to world wheat trade is clear. Watch our video coverage here.

But analysts say that on its own, wheat is very unlikely to produce the kind of more generalized food shocks seen in the second half of 2007 into early 2008. That’s because the main drivers of the 2007-08 food scare were crude oil, which was skyrocketing towards $140 a barrel, and global fertilizers, the price of which rose up eight-fold over the same period, analysts said.

More recently, however, oil and fertilizer prices are up less than 10%, in line with moves in the broader financial markets.

On a year-to-date basis, the agriculture component of the S&P GSCI is down 1.83%, although wheat is up 19.71%. Only precious metals and livestock produced positive returns over the period, rising 8.87% and 5.11% respectively. The total commodity index has barely moved, and is actually down 4.34%.

In other words, so far this is a very concentrated price shock, says Jonathan Anderson of UBS.

He said:

“The recent jump in wheat is already sufficient to bring global agricultural inflation back into the 10% year-on-year range, from close to zero in June. But historically this kind of price growth is consistent with CPI food inflation of 4% to 5% in the emerging world, pretty much where most countries are already. Wheat alone is very unlikely to have a significant impact on CPI baskets.”

At the same time, the supply-demand backdrop is very different. Stocks of major crops are in far better shape this time around, while the wheat price spike is directly related to the supply disruptions in Russia, unlike in 2008, when there were no discernable or major supply issues.

Countries like Egypt, most reliant on imports of wheat, subsidizes domestic consumers and is already taking steps to diversify to alternative sources like France and the U.S. The message is clear: don’t panic, but keep an eye on things.

“Wheat is clearly at the start of the food chain and in 2008 did precede a broader rise in commodity prices,” says HSBC’s Karen Ward. But because the experience of late 2007-early 2008 is so recent, it “has the potential to be self-fulfilling if governments start to stockpile in anticipation, and markets start to speculate about the prospects of a broader rise in commodity prices,” she adds.

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